Taiwan business alarm bells
TaCo’s brilliant editorial cartoon showing President Ma Ying-jeou’s (馬英九) administration inviting Taiwanese banks into China’s bottomless pit, while funny at first glance, was deeply troubling at the second.
Taiwan’s most profitable financial holding company is jumping into the morass that is China’s corrupt state-driven economy. Its prior failure to successfully manage the Taiwan Sports Lottery makes me question this decision.
Apart from the fact that there is no rule of law in China, Taiwanese businessmen and investors need to be aware of a few critical factors.
First, the “overnight banking loan” market in China is a minefield. No bank has appropriate collateral to make even one-day loans, which is simply insane.
“Rehypothecation” is another issue, but many investors do not even understand what it means.
In China, during the housing investment boom when copper prices and imports were zooming upward, warehouses sprang up to house massive piles of the conductive metal, which are all still there today.
However, China’s economy has slowed, which has dramatically reduced the value of these copper stockpiles.
Yet the problem does not end there.
Those who stockpiled copper took out loans against the value of the metal, often to short-term shady lenders, and used the money to speculate in real estate.
The bubble continued growing because not only did the copper-holders take out one loan against the copper, they also took out many more.
The endgame of this scenario is that one claimholder takes possession of the copper, and the nine people with paper receipts get nothing.
This is described as a “counterparty default,” where someone cannot make good on prior promises. If the copper has already gone, paper claims are worth less than the stale air in the empty warehouse.
Economist Michael Pettis has been instrumental in guiding China’s leadership toward free-market and service-oriented reform; the rule of law; and ending corruption and irresponsible practices in China’s banks and the shadow banking system. I believe that his wise advice and his recent piece in Foreign Policy magazine will be heeded.
The fact that inter-bank overnight lending rates spiked as high as 25 percent should be a warning to all Taiwanese businessmen in China.
Indeed, it is highly unlikely that Beijing’s leaders will be able to change China’s economy into anything sustainable.
Indeed, while the talented girl near Zhongshang Dunhua MRT Exit 7 was repainting the ROC flag on my toenails, I was flipping through the mostly worthless and uninformative TV news and programming in Taiwan, not surprised to see another outbreak of green algae in one of the lakes because of too much fertilizer upstream from the farmers’ rivers.
I continue to expect the Year of the Snake to be a startling reversion to the average, featuring twists and turns like a rollercoaster, which is why I continue to recommend buying gold coins against macroeconomic instability.
To paraphrase Gollum from Lord of the Rings: “Preciouss metals are preciouss for a reason, my preciouss.”
New Taipei City
More corrupt than Taiwan
Your article on Transparency International’s survey deserves comment (“Bribery poll finds little faith in politicians,” July 11, page 1).
It is fine for agencies like Transparency International to focus on individual corruption in non-Western countries and to give most Western countries, largely, a free pass.